Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.
How debt settlement works
A debt settlement company will negotiate with your creditors to get your balances reduced so that you would typically be out of debt in 24 to 48 months and pay back only a fraction of what you owe.
The pros and cons of debt settlement
The pros of debt settlement is that it’s the only way to get your debts reduced, which usually means getting out of debt quicker than with a debt management plan. You wouldn’t be harassed by lenders or debt collection agencies any longer and would make only one payment a month, which in this case would be to the debt settlement company. The cons or downside of debt settlement is that you would have to stop making payments to creditors and this would definitely affect your credit score. However, the damage would not be as severe as if you had filed for bankruptcy.
Debt management versus debt settlement
Which of these would be your best option? That’s a decision only you can make. However, many families have found that debt settlement is a better solution as it’s a way to get debts reduced. In comparison, if you owed $15,000 and chose credit counseling, you’d still owe the $15,000 and it would definitely take you longer to pay it off then if you had your balances reduced to $7,500.